☀️☕️ Buffed Up Cash Balances for Buffett

📝 Focus

• Buffed Up Cash Balances for Buffett

📊 In the Markets

• Maersk taking on water

• Musk Groks AI

📖 MoneyFitt Explains

🎓️ Operating Profits

📝 Focus

Buffed Up Cash Balances for Buffett

Berkshire Hathaway's cash reserves rose by close to $10bn to hit a record $157.2bn at the end of the third quarter, during which Warren Buffett continued selling stocks due to a lack of appealing investments. Other than his own shares, of course; Berkshire repurchased $1.1bn of its stock in the quarter.

In the third quarter, the company divested over $5 billion in US and foreign stocks, raising its total stock sales to nearly $40 billion over the past year, with proceeds from stock sales and business cash flows redirected into cash and Treasury bills, now yielding about 5%. This is reflected in interest income on insurance investments, reaching $1.7 billion in the quarter and $5.1 billion over the past year. (Because insurance premiums are paid before any claims are made, insurance companies can invest the “float” for years and years before claims need to be reimbursed.)

Operating profits🎓️ from its businesses, including Geico, BNSF, Duracell, See’s Candies, Brooks and Precision Castparts, reported a 41% profit increase to $10.8 billion. The insurance unit delivered strong underwriting profits of $2.4 billion, offsetting weaknesses elsewhere, with catastrophe losses significantly lower. 

Compared with 2019 results, to remove the pandemic period weakness, operating earnings were 46% higher, but, reflecting all the share buybacks Berkshire has done since, were up 65% on a per share basis.

On the net profit or “bottom line”, though, Berkshire reported a loss of $12.8bn in the third quarter versus $2.8bn lost in the same quarter in 2022, but this was thanks to the decline in the stock portfolio. 

.... ▷ Given the structure of the business as a conglomerate with both operating businesses and enormous public stock holdings, results are heavily impacted by gains or losses from the investment portfolio. Losses from their portfolio, even when unrealised (meaning it’s just based on market prices, not from actually selling shares at a loss), are included in earnings, mushed in with the operating profits of the company. 

..... ▷ In other words, Buffett believes that investors should not focus on short-term fluctuations in net profits but rather on the long-term growth prospects of the company. This is because the value of a company is determined by its ability to generate profits over the long term, not by its quarterly earnings reports, a philosophy he brings, of course, to his stock investing.

..... ▷ Its five largest holdings in publicly traded companies based on the third quarter results are below and represent about 78% of the Berkshire stock portfolio. We also included the first year in which each was added to the portfolio (a lesson in itself.)

What We’re Reading 📚

📊 In the Markets

Hong Kong's Hang Seng Index shot up on Friday to close off its second straight positive week, ignoring a report indicating further contraction in the city's private sector activity in October, with new business, including from mainland China, declining. In contrast, China's service sector saw a slight acceleration in October, with a Purchasing Managers Index of 50.4, indicating sustained growth, although at a marginal rate. A reading above 50 indicates expansion. China's services sector has now expanded for ten consecutive months, according to Caixin.

European stock markets ended the week slightly higher, buoyed by strong earnings and perceived central bank dovishness. Despite the steep decline in shipping giant Maersk, which fell 17% due to lower profit expectations and 10,000 job cuts, the overall pan-regional index remained positive.

US stocks surged as bond yields fell sharply following data indicating a slowdown in US job growth and (typically of Wall Street) an uptick in unemployment to a still-low 3.9%. This buoyed hopes that the Federal Reserve is done with its interest rate hike campaign and Wall Street’s “Fear Gauge”, the CBOE volatility index (VIX) touched a fresh six-week low, showing falling investor anxiety.

The Labor Department report showed a gain of 150,000 jobs in October, lower than the expected 180,000 (though partially due to the strikes at Detroit's Big Three automakers) and the smallest wage increase in 2.5 years, in combination, suggesting a cooling but not collapsing labour market.

The 10-year US Treasury yield, inversely related to bond prices, fell about 35 basis points (each one-hundredth of a percent, or 0.01%) from October's 16-year highs. News of lower-than-expected US government borrowing and signs that the Federal Reserve is approaching the end of its rate hike cycle boosted optimism.

Maersk taking on water

Danish shipping giant Maersk, a bellwether for global trade, plummeted 17% after announcing a steep profit and revenue drop compared to the same period in 2022, which had been a record year.

With the pandemic-induced boom in the shipping industry cooling down, the continued increase in industry capacity and still subdued demand have driven container rates lower. 

Maersk expects profits to be at the lower end of unchanged previous guidance, and it may abandon a share buyback scheme. But it does plan to cut over 10,000 jobs to save $600 million in 2024, even though its net cash position, although reduced, remains at nearly $7 billion.

..... ▷ The pandemic led to record-breaking freight rates, massively amplifying the shipping industry's typical boom and bust cycles and resulting in a surge of orders, further encouraged by demand for cleaner, greener vessels. 

..... ▷ Despite soft demand, the global fleet is still expected to grow 6.4% in 2024 on industry consultant Drewry’s estimates, potentially leading to a 25% oversupply, putting further pressure on freight rates next year.

The latest Drewry WCI composite index of $1,406 per 40-foot container is now 86% below the peak of $10,377 reached in September 2021. 

..... ▷ About this time last year, Maersk was already warning that demand was slowing, which indeed happened, though obviously without the accompanying deep global economic recession that was implied. 

Musk Groks AI

Elon Musk's AI start-up, xAI, has unveiled its first AI model, Grok, a chatbot with "real-time access" to X's data, purportedly giving it a significant edge over rivals relying on the internet and older archives. 

It’s designed to compete with other leaders in the space, such as OpenAI’s GPT and Anthropic’s Claude, and users of X (formerly Twitter) will be able to use Grok for $16 per month.

Grok is powered by Grok-1 LLM, which was developed over a period of just four months, a fully functional Large Language Model (LLM) that offers real-time data and efficiency with (we shudder to think) Elon Musk’s sense of humour.

..... ▷ Elon Musk co-founded OpenAI in 2015 along with a handful of other leading lights of Silicon Valley with the goal of ensuring that artificial general intelligence (AGI) benefits all of humanity.

However, he resigned from the board in 2018 due to potential conflicts of interest with his work at Tesla, which also uses AI. 

In 2023, Musk announced the launch of xAI, a new AI research lab, with the goal of creating a superior AI model that can understand and generate human language.

..... ▷ xAI is an independent company and not owned by X, formerly known as Twitter. It is believed that Elon Musk owns the majority of xAI stock.

While xAI and X have a close working relationship, with xAI's AI chatbot Grok being heavily integrated with X, they are separate entities. 

..... ▷ The word "grok" was coined by prolific science fiction writer Robert A. Heinlein in his classic 1961 novel "Stranger in a Strange Land." 

In the book, it is a transliteration of a Martian word meaning "to drink" and figuratively used to mean understanding something in a profound way.

In the realm of technology, the word "grok" is often used to describe a deep understanding of a programming language, a particular technology or a complex system. It implies a level of expertise and familiarity that enables one to effortlessly navigate and manipulate the subject matter. 

Not pretentious at all.